1. Use the most appropriate valuation model to calculate the expected share price of ABC Corporation using all the variables provided. (round your final answer to two decimal points) (15 marks)

Investment proposal #1 - adding 5 trucks

	Initial expenditure	Year 1	Year 2	Year 3	Year 4	Year 5
Net cost of trucks	$ 300,000
Additional Revenue		$ 44,000	$ 76,000	$ 112,000	225,000	$168,000
Additional cost		(11,000)	(11,000)	(11,000)	(11,000)	(11,000)
Amortization		(45,000)	(66,000)	(63,000)	(63,000)	(63,000)
Net increase in income		(12,000)	(1,000)	38,000	151,000	94,000
Less: Tax at 33%		0	0	(12,540)	(49,830)	(31,020)
Increase in after-tax income		(12,000)	(1,000)	25,460	101,170	62,980
Add back amortization		45,000	66,000	63,000	63,000	63,000
Net change in cash flow	$(300,000)	$33,000	$65,000	$88,460	$164,170	$125,980

The second proposal is to purchase a more advanced wood crafting machine. The projected revenues and costs and changes in net cash flow are summarized in the table below:

Investment proposal #2 - adding a wood crafting machine:

	Initial expenditure	Year 1	Year 2	Year 3	Year 4	Year 5
Net cost of trucks	$ 700,000
Additional Revenue		$ 87,000	$ 175,000	$ 262,000	393,000	$325,000
Additional cost		(26,000)	(26,000)	(26,000)	(26,000)	(26,000)
Amortization		(17,000)	(17,000)	(17,000)	(17,000)	(17,000)
Net increase in income		44,000	132,000	219,000	350,000	282,000
Less: Tax at 33%		(14,520)	(43,560)	(72,270)	(115,500)	(93,060)
Increase in after-tax income		29,480	88,440	146,730	234,500	188,940
Add back amortization		17,000	17,000	17,000	17,000	17,000
Net change in cash flow	$(700,000)	$46,480	$105,440	$163,730	$251,500	$205,940

The third proposal is to add a new production line making new type of baby furniture. The projected increased revenues and costs and net changes in cash flows are summarized in the table below:

Investment proposal #3 - adding a new product line:

	Initial expenditure	Year 1	Year 2	Year 3	Year 4	Year 5
Net cost of trucks	$ 510,000
Additional Revenue		$ 381,000	$ 310,000	$ 87,000	$70,000	$ 51,000
Additional cost		(19,000)	(19,000)	(25,000)	(31,000)	(38,000)
Amortization		(76,000)	(112,000)	(107,000)	(107,000)	(107,000)
Net increase in income		286,000	179,000	(45,000)	(68,000)	(94,000)
Less: Tax at 33%		(94,380)	(59,070)	0	0	0
Increase in after-tax income		191,620	119,930	(45,000)	(68,000)	(94,000)
Add back amortization		76,000	112,000	107,000	107,000	107,000
Net change in cash flow	$(510,000)	$267,620	$231,930	$62,000	$39,000	$13,000

Answer rating: 100% (QA)

Estimating the expected share price of ABC Corporation utilizing the Net Present Value NPV method This approach involves discounting future cash inflows at an appropriate discount rate Here I assume a ... View the full answer